Industrial Stacks Up
Secondary and tertiary markets benefit from key demand drivers.
It didn’t take long for Jeff Castell, CCIM, SIOR, to find a
buyer for his client’s 704,000-square-foot distribution center in Franklin,
Ind., earlier this year. A principal at Cassidy Turley in Indianapolis, Castell
knew the property’s 32-foot clear heights and massive size fit the needs of
today’s most active industrial users. And with his client planning to vacate
the space after the sale, there was an opportunity to capitalize on user demand
in this suburb on the south side of Indianapolis, which is one of the most
sought-after markets for distribution centers in the country.
Castell’s team identified a tenant, Anderson Merchandisers,
to take the entire space, and, based on that lease, was able to sell the
property in March to a joint venture of Alex. Brown Realty and Biynah
Industrial Partners. Less than a month later, the joint venture sold the
property again, to Stag Industrial, for a staggering $18 million or nearly $25
Midwest in Demand
The transactions underscore the brisk pace and healthy
pricing of both leasing and investment deals today in the Midwest industrial
markets, and particularly in Indianapolis, where proximity to large population
centers and resurgent manufacturing is driving demand. “There’s a combination
of continued demand and lack of product in central Indiana,” says Castell. “As
a result, we’ve got between 3 million and 3.5 million sf of speculative
construction under way right now.”
Industrial Developments International is developing one of
those speculative projects, an 800,000-sf distribution building at AmeriPlex
Business Park, next to Indianapolis International Airport, says the company’s
broker, Jeremy Woods, CCIM, SIOR. The industrial vacancy rate in Indianapolis
is 7 percent overall and a scant 5 percent for the most modern space, according
to Woods, who is executive vice president at Summit Realty Group in
Indianapolis. Historically, the market’s vacancy rate has averaged about 14
percent. “We are at an unprecedented low vacancy rate in that modern bulk
space,” Woods says.
The tight market stems from a banner leasing year in 2008,
when the market absorbed about 8 million sf of industrial space at the same
time that speculative construction came to a halt. Absorption has continued to
eat away at available space ever since, as companies have taken Indianapolis
buildings in order to consolidate their supply chains and reduce costs, Woods
What is Indianapolis’ secret to success? In addition to the
city’s geographic advantage for supply chain hubs, recently passed
right-to-work legislation has increased Indiana’s appeal to corporate users
seeking affordable skilled workers, Castell says.
The availability of non-union, skilled labor is also helping
to drive demand for manufacturing space in western Michigan, says Duke Suwyn,
CCIM, SIOR, president and CEO of Colliers International in Grand Rapids, Mich.
The most active leasing activity of late has involved manufacturers of food and
specialized automotive parts, but makers of pharmaceuticals and other
specialized, low-volume products are also taking space.
“We’re in a crazy situation here — we are out of inventory
and we have very strong demand for space,” Suwyn says. In July, one of Suwyn’s
clients received final approval to develop an 85,000-sf structure for light
manufacturing and distribution uses in Kentwood, Mich., in a build-to-suit for
an undisclosed user. “That will be the first new standalone industrial construction
we’ve seen in years,” he says.
A Nation Recovers
The Midwest is perhaps the brightest spot among industrial
markets in 2012, but it isn’t alone. The U.S. industrial market showed marked
strength at midyear, with a net 22.5 million sf of space absorbed by tenants in
the second quarter, according to New York-based research firm Reis. The
national vacancy rate ended the quarter at 13 percent, down 30 basis points
from the first quarter and down 80 basis points from a year earlier.
“The second quarter was the strongest quarter we’ve seen in
the past year,” says Brad Doremus, Reis’ senior analyst. “Rents were also the
highest we’ve seen them grow since one year ago as well.”
Asking annual industrial rent averaged $5.35 psf in the
second quarter and was up 0.5 percent from the first quarter, Reis reports.
Effective rent, which factors in incentives, was $4.81 psf, up 0.6 percent from
the previous quarter. “Incentives have started to tighten, which is a good sign
for owners,” Doremus says.
He attributes the healthy occupancy numbers in part to a
remarkably small supply of new construction in the pipeline. Developers
delivered just 2.3 million sf of industrial space in the second quarter, down
from 2.5 million sf in the first quarter. “We’re seeing some of the lowest
construction figures we have ever seen,” he says.
Industrial Hot Spots
Manufacturing and a resurgent automotive industry is fueling
leasing activity in the Midwest, Doremus confirms, and seaport activity is
driving up occupancy and rental rates all along the West Coast. Absorption is
increasing in the Mid-Atlantic markets of Atlanta and Raleigh/Durham, N.C., and
even in Tampa, Fla., all of which may be benefiting from the pending expansion
of the Panama Canal, Doremus
Here are a few of the trends generating deals today, based
on a recent survey of CCIMs.
Denver is a great place to live, and businesses that support
its growing population are driving industrial demand there. Vacancy is less
than 10 percent, according to Steve Poole, CCIM, vice president of industrial
sales at Cassidy Turley Fuller Real Estate in Denver.
From Denver northward, a thriving oil and gas industry has
soaked up nearly all of the older industrial stock, says Mark Bradley, CCIM,
SIOR, managing broker of Realtec Greeley in Greeley, Colo. Exploration
companies and venders serving the sector are chiefly interested in industrial
buildings they can drive a truck into, with plenty of space for truck courts
and outdoor storage. “Our vacancy rate has gone from 18 percent or so a year
ago to 7 percent or 8 percent right now,” Bradley says. “Absorption has been
strong all along the Highway 85 corridor from North Denver to Wyoming.”
In Texas, industrial demand is strong in the Tarrant County area to serve industries ranging from automobiles to call centers, food,
importers, and security, says Jennifer Gray, CCIM, broker and managing partner
for Northeast Tarrant and Denton counties at Bradford Commercial Real Estate
Services in Southlake, Texas.
Shannon Owens, CCIM, vice president of Glacier Commercial
Realty in Irving, Texas, says a number of companies new to North Texas are
leasing spaces from 20,000 sf to 30,000 sf while they test the market. Many of
her technology and engineering clients have doubled their headcounts and square
footage over the past 18 months to handle increased business.
And in California’s Inland Empire, manufacturers are taking
space as a more affordable alternative to properties in Los Angeles, where
port-related demand keeps lease rates at a premium, reports Tony Guglielmo,
CCIM, broker/owner of Allied Commercial Real Estate in Ontario, Calif.
Many markets that entered the recession with an overhang of
space continue to struggle with weak demand and anemic rental rates. Lease
rates are down 20 percent or more from their peak in Goshen, Ind., according to
Steve Pettit, CCIM, senior associate broker at CB Richard Ellis|Bradley. In
Columbus, Ohio, it is still a tenant’s market due to a space glut, reports
Kevin McGrath, CCIM, associate vice president at Cassidy Turley in that city.
A chicken-and-egg dilemma is hampering industrial
development in the Carolinas, brokers say. Both Brooke Gibson, CCIM, broker at
Hart Corp.|International Industrial Real Estate in Charlotte, N.C., and Mike
Ferrer, CCIM, vice president for industrial brokerage at Avison Young in Mount
Pleasant, S.C., say there is a shortage of modern distribution space in their
markets. Yet banks won’t fund speculative construction to meet that need, and
tenants are reluctant to commit to space before it is built.
Atlanta may be hardest hit industrial market in the nation
as it struggles with an oversupply and weak demand, says Rick Tumlin, CCIM,
SIOR, senior partner at Lee & Associates in that market.
Indeed, the recent uptick in industrial demand is a shadow
of what it was in healthier years, with the number of retailers seeking
industrial space down about 60 percent since 2008, according to Paul Waters,
CCIM, SIOR, FRICS, executive managing director of industrial brokerage for the
Americas at NAI Global in New York City. Waters works with major corporate end
users of industrial space and currently is helping a discount retailer
re-engineer its supply chain by developing a half-dozen large distribution
centers around the country.
Of the few corporations seeking industrial buildings, most
prefer large, modern buildings measuring 450,000 sf to 1 million sf. “And in
most cases, they’re looking to build,” Waters says, adding that companies can
take advantage of favorable market conditions to construct space that fits
their needs exactly rather than adapt to existing digs in most markets.
Waters doesn’t paint a rosy picture for 2013, either,
predicting that demand for space will continue near current levels until
employment improves and boosts consumer spending. “We need to put people back
to work so they can buy things that retailers sell,” he says. “People are
expecting great changes after the [November] election, but I don’t see any
change coming for industrial next year.”
But Doremus, the Reis analyst, is optimistic about 2013,
trusting that once the markets move past the uncertainties of 2012, companies
will adjust to conditions at home and abroad and make more real estate
decisions. That means absorption will accelerate, and rents will rise soon
Matt Hudgins is a real estate business writer based in
Industrial Investors Gravitate to Secondary Markets
Investors are increasingly seeking high-quality industrial
assets in second-tier cities as an alternative to acquiring properties in
primary markets where bidding wars have driven prices to unpalatable levels,
CCIMs tell CIRE.
In primary industrial markets like Chicago, investors are
buying fully leased, well-located class A properties at less than a 6 percent
capitalization rate, according to Kenneth Szady, CCIM, SIOR, executive managing
director and head of the Midwest Capital Group at Newmark Grubb Knight Frank in
When cap rates fall below that 6 percent threshold,
investors begin to either look for lower quality or less well-located assets in
the primary markets, or they begin shopping for class A properties in secondary
markets, Szady says. In either case, those investors will acquire assets in a
cap rate range from 7.5 percent to 8.5 percent.
That’s based on Szady’s experience over a 24-year career in
which he has closed $7.2 billion in transactions, including two of the largest
deals of 2012. This past summer, he represented the Gullo family in selling a
330,000-square-foot industrial portfolio in Elk Grove Village, Ill., near
O’Hare International Airport, to Morgan Stanley. In March, he closed a 1.35
million-sf build-to-suit transaction for the Clorox Co. in University Park,
Ill., on behalf of an institutional client. (Szady was executive director and
head of capital markets at Cushman & Wakefield at the time of the March
Indeed, CCIMs in secondary markets with low vacancy rates,
including Indianapolis, northern Colorado, Texas, and other markets with
expanding regional economies, report strong investor interest in industrial
properties. “Yields look pretty good here especially when coupled with the
excellent story Indy can tell,” says Jeremy Woods, CCIM, SIOR, executive vice
president of Summit Realty Group in Indianapolis. “We are also seeing an
appetite for class B value-add properties as the newer, more modern space is
beginning to get frothy.”
At least for the next year or two — until construction can
introduce new supply to the primary markets — investors will be active buyers
in the secondary markets, Szady predicts. “We’re just opening the floodgates
into the secondary markets,” he says, “and it’s the beginning of the cycle.”